Introduction to
Topics in Macroeconomics 2
Chapter 1
Topics in Macroeconomics 2
Economics Division
University of Southampton
February 1 & 5, 2010
Chapter 1
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Topics in Macroeconomics
Course Outline
Topics in Macroeconomics 2
Alice Schoonbroodt
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E-mail:
alicesch@soton.ac.uk
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Web site:
http://www.economics.soton.ac.uk/staff/alicesch/Teaching.htm
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Office Hours:
Wednesdays from 14:00 to 16:00 or by appointment
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Topics in Macroeconomics
Course Outline
Topics in Macroeconomics 2
Textbook
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Williamson, Stephen D., “Macroeconomics” Pearson /
Addison Wesley.
Meetings (see Timetable.pdf)
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20 Lectures: Weeks 18 to 23; Weeks 29 to 32
Note 1: Independent study week: Week 24 but...
Note 2: February 26: cancelled, recup March 15 (Week 24)
Note 3: May 3: Bank Holiday, recup May 17 (Week 33)
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8 Master Classes: Weeks 20 to 23; Weeks 29 to 32
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Topics in Macroeconomics
Course Outline
Topics in Macroeconomics 2
Assessment
Weight
Date
Quiz I
5%
March 8, 2010
during Lecture
Quiz II
5%
May 14, 2010
during Lecture
Exam
90%
During the final exam period
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Topics in Macroeconomics
Course Outline
Macroeconomics
What Do We Study in Macroeconomics?
◮
The behaviour of large collections of economic agents
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The behaviour of governments
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The overall level of economic activity
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The economic interaction among nations
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The effects of fiscal and monetary policy
Main Issues in Macroeconomics
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Long-run growth
◮
Business Cycles
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Topics in Macroeconomics
Course Outline
Course Outline
Part I: Intro and Measurement Issues
1. Introduction
2. Measurement
3. Business Cycles Measurement
Part II: A One-period Model of the Macroeconomy
4. Consumer and Firm behaviour
5. A Closed-Economy One-Period Macroeconomic Model
Part III: Economic Growth (independent study week)
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Topics in Macroeconomics
Course Outline
Course Outline (cont.)
Part IV: Savings, Government Deficits and Investment
8. A Two-Period Model: The Consumption-Savings Decision
9. A Real Intertemporal Model with Investment
Part V: Money and Business Cycles
10. A Monetary Intertemporal Model: The Neutrality of Money
11. Market-Clearing Models of the Business Cycle
12. Keynesian Business Cycle Theory: The Sticky Wage
Model (if time allows)
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Macroeconomics
What Do We Study in Macroeconomics?
◮
The behaviour of large collections of economic agents
◮
The behaviour of governments
◮
The overall level of economic activity
◮
The economic interaction among nations
◮
The effects of fiscal and monetary policy
Main Issues in Macroeconomics
◮
Long-run growth
◮
Business Cycles
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Aggregate Production
Gross Domestic Product (GDP)
Monetary value of final output produced during a given period
of time within the borders of a country
Real GDP per capita
(adjusts for inflation and population growth)
One measure of a country’s standard of living
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Topics in Macroeconomics
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Chapter 1: Introduction
Macroeconomic Events
Figure 1: Real GDP per capita since 1900
(year 2003 pounds)
£20,000
£18,000
RGDP per capita
£16,000
£14,000
£12,000
£10,000
£8,000
£6,000
£4,000
£2,000
02
96
20
19
84
90
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42
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24
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06
12
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00
£0
Year
Source: Lawrence H. Officer, "What Was the U.K. GDP Then?", MeasuringWorth.Com, 2007.
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Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Some Observations
◮
There has been sustained economic growth in per capita
GDP during the 20th century
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In 1900 the average income for a Brit was approx. £4,000
(2003 pounds)
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In 2006 it was almost £20,000
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Average Brit became almost 5 times richer in real terms in
100 years
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Although growth was sustained it was not constant
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These fluctuations are called business cycles
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Unusual Business Cycle Events
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The Inter War and Great depression (1919–1937)
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The Second World War
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In 1918, Real GDP was 20% higher than in 1921 and 10%
higher than in 1932!
From 1932 to 1943, real GDP per capita increased by 52%!
Current events???
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Questions raised by Figure 1
Motivation for this Course
◮
What causes sustained economic growth?
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Could economic growth continue indefinitely, or is there
some limit to growth?
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Is there anything that governments can or should do to
alter the rate of economic growth?
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What causes business cycles?
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Could the dramatic decreases and increases in economic
growth that occurred during the Great Depression and
WWII be repeated?
◮
Should governments act to smooth business cycles?
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Topics in Macroeconomics
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Chapter 1: Introduction
Macroeconomic Events
A Useful Transformation for Growing Time Series
The Natural Logarithm and the Rate of Growth
Fact
If x is small, log(1 + x) ≈ x
Consider a time series yt , t = 1928, 1929, . . .
Let gt denote the growth rate from period t − 1 to period t:
gt =
yt
yt−1
−1
If gt is small, log(yt /yt−1 ) = log(1 + gt ) ≈ gt
If we plot the natural log of GDP, the slope is the growth rate:
log(yt ) − log(yt−1 ) = log(yt /yt−1 ) ≈ gt
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Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Figure 2: Natural Logarithm of Per Capita Real GDP
4.4
4.2
4.1
4.0
3.9
3.8
3.7
3.6
3.5
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Log RGDP per capita
4.3
Year
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Some Observations
◮
Growth was very low (negative) during the Great
Depression
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Growth was very high during WWII
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Other than these “unusual” events, log GDP is almost a
straight line
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That means growth is fairly constant, around 2% per year
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Other Useful Transformations
Time series can be decomposed into two components:
◮
A growth or trend component
For the most part, close to 2% per year for GDP
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A cyclical or business cycle component
These are fluctuations around trend GDP
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Topics in Macroeconomics
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Chapter 1: Introduction
Macroeconomic Events
Figure 3: Natural Logarithm of RGDP pc and Trend
4.4
Log RGDP per capita
4.2
Trend
4.1
4.0
3.9
3.8
3.7
3.6
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Topics in Macroeconomics
02
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Year
Chapter 1
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Log RGDP per capita
4.3
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Figure 4: Percent Deviations from Trend in RGDP pc
15%
Deviations
On Trend
5%
0%
-5%
-10%
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-15%
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Deviations from Trend
10%
Year
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Macroeconomic Models
◮
Simplification of reality
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We want to keep models as simple as possible
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Capture the relevant features of the actual economy for the
question one is trying to address
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Models are specific to the economic problem we want to
study
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Abstracts from other features, even realistic ones
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Basic Structure of Macroeconomic Models I
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The consumers and firms that interact in the economy
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The set of goods that consumers wish to consume
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Consumers’ preferences over goods
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The technology available to firms for producing goods
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The resources available
Note: Models usually have a mathematical representation,
which we will try to analyze in graphical terms
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Basic Structure of Macroeconomic Models II
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The behaviour of economic agents
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How is consistency achieved between consumers and
firms?
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We will assume that consumers and firms optimize
The economy must be in equilibrium
We will use the competitive equilibrium concept
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Goods are bought and sold on markets where consumers
and firms are price takers
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Equilibrium is achieved when prices are such that supply
equals demand for all markets
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
What Are Macroeconomic Models Used for?
◮
Before using the model for any purpose
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We want to make sure that the model makes sense for the
particular problem we want to study
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For example: if you study growth, there better be growth in
the model to start with
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This can be done analytically, graphically, or numerically
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
What Are Macroeconomic Models Used for?
◮
Use the model to answer questions of interest
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Unlike the test above, we now want to answer questions for
which we don’t know the answer!
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Example 1: how fast would the UK have grown in the last
century if capital income taxes had remained zero
throughout the century?
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Example 2: how should government expenditures be
financed in order to maximize growth (or welfare)?
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
Microeconomic Principles
◮
The macroeconomy ultimately consists of many
consumers and firms
◮
Macroeconomic behaviour results from many
microeconomic decisions
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Government policies may affect behaviour in ways that are
virtually impossible to model at the aggregate level
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This is generally known as the Lucas Critique
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We now deal with rational expectations models, which
emphasize microeconomic foundations
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Introduction
GDP
Macroeconomic Models
Microeconomic Principles
What Are we Going to Learn?
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◮
◮
◮
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What is produced and consumed in the economy is
determined jointly by the economy’s productive capacity
and the preferences of consumers
In free market economies, there are strong forces that tend
to produce socially efficient economic outcomes (Adam
Smith’s invisible hand)
There is no such thing as a free lunch — In particular, tax
cuts are not free, nor are taxes in general
What consumers and firms anticipate for the future will
have an important bearing on current macroeconomic
events
Improvements in a country’s standard of living are brought
about in the long run by technological progress
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Figure 5: Interest Rates and Inflation Rate
25%
Nominal Interest Rate
20%
Inflation Rate
15%
Real Interest Rate
10%
5%
0%
-5%
-10%
-15%
-20%
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-25%
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
Figure 6: Unemployment Rate
Figure 1: UK Unemployment Rate, 1870-1999
18.00
16.00
14.00
10.00
8.00
6.00
4.00
2.00
Year
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Topics in Macroeconomics
1998
1994
1990
1986
1982
1978
1974
1970
1966
1962
1958
1954
1950
1946
1942
1938
1934
1930
1926
1922
1918
1914
1910
1906
1902
1898
1894
1890
1886
1882
1878
1874
0.00
1870
Unemployment Rate
12.00
Chapter 1: Introduction
Macroeconomic Events
Figure 7: Deviations from Trend for Unemployment
and GDP (U.S.)
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Topics in Macroeconomics
Chapter 1: Introduction
Macroeconomic Events
To do:
◮
Read Chapter 1 in Williamson’s book
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Make sure you know the definitions and understand the
“KEY TERMS” from this chapter (p. 32–34)
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Practice your knowledge by attempting to answer the
questions for review and solving (at least some of) the
problems (p.34–35)
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Let me know if you have any problems understanding early
on!!!
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